“Loads of doh” or “too much” may be your first thought. How much is “too much”? Money is a representation and transfer of value. What is value in this instance? Is the job that is done by the insurance agent, sufficient to reduce the ‘pain’ for the client and therefore solves that client’s problem? Does the financial adviser meet all of the regulatory requirements while adhering to the insurer’s agency and contractual obligations?
- What ‘job is done’ for the client
- Business costs
- Agent commissions
What ‘job is done’ for the client
When I studied at Massey, there was a fairly simple way to describe the desired interaction for a customer and business. From the client’s perspective, what ‘pain’ do they want removed (a pain that might exist now or in the future), what ‘gain’ are they trying to achieve and what ‘job are they trying to get done’ with the business’s product or service. It is then the business’ responsibility to solve that pain, gain and job-to-be-done.
Pain, gain and job-to-be-done. All businesses will satisfy one or all these conditions for the customer. Buying a cup of coffee? You body needs caffeine, it is in the pain of caffeine withdrawal, you want to gain the caffeine hit to your system, and you need to focus so that your job can be done for another few hours! A tongue-in-cheek example but helps to set the scene for the next paragraph.
People buy insurance, not because it is a sexy item that they can discuss with their Instagram followers, but because it meets one, two or three of the above conditions. Life insurance (and in this definition we’ll include the other types of products like Income Protection or Trauma cover etc), will alleviate the ‘pain’ of knowing that they should plan for the ‘what if’ worst-case scenario. The insurance will provide an income or cash injection should a health event happen, thereby giving the client a ‘gain’, and the ‘job’ that it solves is to give the client peace-of-mind about their financial security.
Enter stage left, the insurance agent. This person will spend a lot of time with the client, understanding their situation, researching the best solutions, discussing these solutions with the client and then helping them through the application and underwriting process. After the policy is issued, that same insurance broker will continue to regularly have contact with this client, sometimes twice a year. They will also assist with any claims that the client needs to process. This financial adviser is an advocate for the client in all dealings with the insurance provider.
For now we will set aside the cost of sitting in front of the client for the first time. Every business will have an ‘acquisition cost’ for new business. What we will do however, is take things from the first meeting. This will typically be about 40minutes to an hour, to complete the fact-finding process and gather as much information as possible on the client’s situation.
Depending on the agent and the process used, there will then be 2-4 hours of work to research the market. This research will typically include looking at different providers, calling the underwriters of different insurance providers, finalising the quote and drawing up the recommendation document.
Then the presentation will take around 20-30 minutes to make sure the clients fully understand the recommendation and its implications. Then there is the application to do, most of which can be done online quite efficiently. Next the fun begins with the underwriters. Most of this effort goes unseen by the clients. There can by many conversations between the insurance providers and the broker to assist the application going through to the stage of being issued.
More time is spent with the clients to confirm the terms with the provider. Then the policy is issued. Here again, the client’s view stops, but the financial adviser still needs to tidy up the last parts of the compliance process and documentation.
This entire process can end up taking 4-10 hours to get a client a policy. If it seems like a long time, yes it can be. Financial advisers must meet the Code of Conduct and other regulatory requirements. The insurance companies, with whom brokers have agencies, have their own obligations for us to meet. Each client (and prospective client) has time and energy invested. Financial advisers work hard to make sure that their advice is ‘fit for purpose’ and compliant. Most clients will never know this, and arguably, they don’t need to. However, this time and compliance are functions of the business cost.
In March 2021, all financial advisers will have to disclose how much we get paid in commissions.
Different insurance agencies will have different commission amounts congruent with negotiations and the size of business. If we use a modest commission rate of 150% of the annual premium, we will see what that might translate to in dollar terms. We will then apply that to the work performed above. At that point, we will glimpse this thing called ‘value’.
Assume that the policy above is modest for an Auckland family, around $2,600 a year. At 150%, that is $3,900. This is meant to represent the first two years of the policy. Out of this amount comes the GST (if any). Let’s assume that this policy took 8 hours to complete all the way, that equates to $487.50 per hour.
While that sounds high for an hourly rate, that is not a representative way of looking at the commission. Remember above I mentioned in the first couple years, there will be reviews and ‘client check-ins’ regularly, maybe even every six months? This commission payment includes all that activity too.
After a two-year period do the renewal commissions start being paid. This is a modest amount to ensure that the client is still being ‘looked after’ by the financial adviser. It is the insurance provider’s leverage to ensure that client is still being loved and treated well.
On top of that, whenever the client needs to claim, the adviser is there to jump in and help. The time taken for claims assistance is not measured directly in the hourly rate above. But it is a necessary function of the financial adviser.
One last comment on the time taken for clients. Not all clients who apply for insurance end up with insurance. This can mean that 4-8 hours of work can go in to trying to help a client, only to have the application fall over. This might be due to underwriting concerns or other situations. Some clients may take two separate applications to different providers before a policy is sussed for them. Whatever the reasons, these are ‘lost hours’ or you could describe it as ‘unpaid’ work.
Don’t be fooled by a simple hourly rate to establish the dollars that financial advisors are paid per policy. The value of the advice, the product knowledge, the compliance, the regulations that are adhered to, all form part of the overall commissions and revenue that agencies collect. If your spouse died tomorrow, and the insurance provider seemed to be making the process difficult for you, would you want to speak to the human you knew or a robot on your computer? The real ‘value’ of the financial adviser shows itself in the most unexpected times.